Q1 2022 Banc of California Inc Earnings Call
Hello, and welcome to the Banc of California's first quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and to withdraw. Your question. Please press Star then two today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website today's.
Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available to the earnings press release.
Which is available on the company's Investor Relations website. The reference presentation is also available on the company's Investor Relations website before we begin we would like to direct everyone to the company's safe Harbor statement on forward looking statements, including in both the earnings release and the earnings presentation I would now like to turn the conference over to Mr. Jared Wolff Banc of California's.
President and Chief Executive Officer. Please go ahead Sir.
Good morning, and welcome to Banc of California's first quarter earnings call.
Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results.
We had a great start to the year with many positive trends and actions instead of continuing to drive our financial performance forward.
High quality loan growth.
Solid inflows of noninterest bearing deposits margin expansion higher levels of noninterest income.
Strong asset quality.
These efforts directly resulted in an increase in our adjusted pretax pre provision income, which was up 10% from the prior quarter.
While our adjusted pre tax pre provision return on average assets increased 16 basis points to 155%.
The increased level of returns reflects our franchise momentum.
Presenting both our ability to continue generating profitable organic growth.
And the accretive benefits of the Pacific Mercantile acquisition.
As always we will also remain focused on growing and deploying capital to enhance our franchise value.
As previously reported we recovered over $31 million related to a loan previously charged off in 2019.
Which contributed to growth in our tangible book value.
We also successfully redeemed all of our series D preferred stock in the quarter and authorized and initiated an opportunistic stock repurchase program.
We had a solid quarter of business development with $679 million in new loan fundings and total production increased 7% compared to the prior quarter.
Loan demand was partially impacted by some level of seasonality that we typically experienced at the beginning of each year.
We also had some commercial clients delaying planned investments in expansion due to the sudden surgeon omicron that hit early in the year, while several opportunities in real estate lending were put on pause. This client's digested the rising rate environment and how it could impact pricing on properties.
Notwithstanding these temporary factors, we still grew our total loans at a double digit annualized rate, while also keeping our warehouse line balances relatively stable. Despite the higher mortgage rates that have impacted production volumes across the industry.
This reflects the outstanding job that our team has done developing numerous relationships and.
And giving us many levers to pull in order to achieve our targets.
Even as warehouse loan balances may moderate a bit.
We expect our balance sheet to expand and earnings growth to meaningfully follow.
We saw some firming up of loan pricing during the quarter, which resulted in higher average loan yields on both core C&I loans, enbridge and permanent CRE loans.
We are always disciplined about loan pricing, but ahead of the interest rate increases we have been more selective in adding long term fixed rate loans to our balance sheet.
Our momentum has been strong notwithstanding the rate environment and our loan pipeline is currently more than double what it was at the same time last year.
On the liability side we.
We saw further improvement or deposit mix, driven by continuing inflows of low cost deposits, resulting from our business development efforts.
During the first quarter, we opened $122 million and noninterest bearing and low cost checking accounts for new clients.
In addition to inflows from existing clients.
These new relationships helped to drive a $170 million or 6% sequential increase in noninterest bearing deposits, which brought noninterest bearing to 40% of total deposits at the end of the quarter.
As many of you know this is a threshold we targeted from the moment I got to the bank and I am truly proud of our team for reaching this milestone.
More importantly, I am proud of how we reached this milestone there is no shortage of hard work and we have built a terrific deposit engine.
While I expect in the coming quarters, we might move above or below this level. Our overall trajectory will be to keep increasing our percentage of noninterest bearing deposits.
Okay.
As we mentioned on our last earnings call.
Following the Pacific Mercantile acquisition.
We took a number of balance sheet management actions, including running off their higher cost deposits and beginning to redeploy the cash balances that were added in the transaction.
The full quarter impact of these actions along with the continued growth in non interest bearing deposits further reduced our cost of deposits and continued contributed to a 23 basis point increase in our net interest margin from the prior quarter.
This benefit began before the fed started to increase the fed funds rate.
Given our asset sensitivity, we expect our margin to react positively.
Be it not necessarily at the same pace that we enjoyed in the first quarter.
That said as mentioned before.
Our margin is an output of many items and while our yearly trend will be upward various factors could cause it to move up or down during a given quarter.
In addition to our strong financial performance, we had a very productive quarter in terms of executing on key strategic initiatives to optimize our balance sheet accelerate our earnings growth strengthen our franchise and create value for shareholders.
First.
We've mentioned in the past that banc of California has become a talent magnet.
In the first quarter, we were able to add some exceptional bankers to support the strong growth opportunities we are seeing in many areas.
These hires are bringing additional expertise relationships and skill sets that complement our existing teams.
And will enable us to continue expanding our business development capabilities in both CRE and C&I, particularly in some of the large attractive vertical industries, where we have built good momentum.
And see the potential to substantially grow these portfolios over the next few years.
Yes.
Second <unk>.
Consistent with our expected timing, we were able to redeem our series a preferred stock, which simplifies the balance sheet and will positively impact net income available to common stockholders by approximately $7 million annually.
Third through.
Through the successful efforts of our legal team, we were able to recover over $31 million on a loan previously charged off in the third quarter of 2019.
We continue to pursue a number of other recovery opportunities, both the credit and insurance related.
If successful resolutions are obtained we will benefit shareholders and add to our tangible book value down the road.
And fourth given the substantial progress we have made in both strengthening our balance sheet and growing earnings over the past few years.
We enhanced our capital allocation strategy with the authorization of an opportunistic 75 million stock repurchase program, that's equivalent to approximately 6% of our current shares outstanding and should further optimize our balance sheet and create value for shareholders.
As we've said before.
Our goal is to continue moving the ball down the field every quarter.
Some quarters, we'll make more progress than others, but every quarter, we want to execute and deliver in a way that grows our financial performance and strengthens the franchise.
Through the positive trends, we continue to see in our financial results and our strong execution on other initiatives that positively impact earnings and shareholder value, we had an exceptional quarter of moving the ball down the field and creating shareholder value.
Now I'll hand, it over to Lynn, who will provide more color on our financial performance and then I'll have some closing remarks before opening up the line for questions.
Thank you Darrin.
As mentioned, please refer to our investor deck, which can be found on our Investor Relations website as I review, our first quarter performance.
I'll start by reviewing some of the highlights of our income statement.
Move to our balance sheet trends.
Unless otherwise indicated all prior period comparisons are with the fourth quarter of 2021.
Invite you to read our earnings release, which provides a great deal of information. So I will limit my comments to some of the areas where additional discussion is warranted.
Net income available to common stockholders for the first quarter was $43 $3 million or <unk> 69 cents per diluted share.
$4 million or <unk> <unk> per diluted share for the fourth quarter of 2021.
Fourth quarter results included on a pre tax basis of $31 $5 million reversal of provision for credit losses.
With $31 3 million related to a recovery from a settlement of a loan previously charged off in 2019, and a $3 $7 million after tax expense related to the preferred stock redemption.
No similar items in the prior quarter's results.
However, the fourth quarter included on a pre tax basis, $13 5 million of merger costs and $11 3 million of provision for credit losses related to loans and unfunded commitments acquired in the Pacific Mercantile acquisition.
The noise created from these items will focus on our adjusted pretax pre provision numbers this quarter, which are more reflective of our core performance.
Our adjusted pretax pre provision income totaled $35 8 million, a 10% increase from $32 7 million from the prior quarter.
The $3 million increase was due to higher net interest income of $3 4 million driven by higher average loans and an increase in net interest margin as well as higher noninterest income of $1 1 million offset by higher operating costs of $1 3 million.
Portion of these increases related to the impact of including Pacific Mercantile the operations for a full quarter.
Our net interest margin increased 23 basis points to 351% during the quarter as.
As our overall, earning asset yield increased by 21 basis points and a total cost of funds decreased by two basis points.
Our earning asset yield increased to 387% due to a favorable shift in the mix of our earning assets as we deployed our excess liquidity and increased average loans, both from the impact of including <unk> balance sheet for a full quarter and our own net loan growth.
In addition, the yields on loans and securities increased during the first quarter.
Average loan yield increased six basis points to 426%, primarily due to higher average yields in our commercial real estate C&I and SSR portfolios.
This increase also includes a lower contribution from PPP related income, which was measured at two basis points of our net interest margin this quarter compared to five basis points in the prior quarter.
Our average cost of funds decreased two basis points to 39 basis points due mostly to lowering our average cost of deposits by three basis points to eight basis points for the first quarter.
The decrease in our average cost of deposits reflected an increase in our mix of noninterest bearing deposits, which averaged 38% of total average deposits for the first quarter compared to 35% for the fourth quarter.
Our adjusted expenses increased $1 3 million from the prior quarter, which was primarily due to including <unk> operations for a full quarter with <unk>.
Recently higher salaries and benefits expense that are typical of the beginning of each year and the additions we have made to our banking teams to support our continued balance sheet growth.
And at the end of the first quarter, we had met our goal of realizing cost savings of greater than 40% of Pacific Mercantile operating expenses.
The effective tax rate for the first quarter was 27, 9% compared to 32, 4% for the fourth quarter.
The decrease in the effective tax rate was due mostly to the impact of Pacific Mercantile acquisition had on our annual effective tax rate and other permanent items in the fourth quarter of 2021.
Our annual effective tax rate for 2022 is estimated to be approximately 28%.
Turning to our balance sheet total assets increased by $189 8 million in the first quarter.
296 billion and total equity decreased by $86 3 million.
The decrease in total equity was due mainly to the full redemption of our series a preferred stock higher.
Higher net unrealized losses in the investment portfolio and other capital actions, all offset by our net earnings for the quarter.
Our other capital actions included our preferred and common stock dividend as well as repurchasing $4 $3 million in common stock under the program, we announced in mid March.
At March 31, our tangible book value per common share was <unk> 14 O five up from $13 88 at the end of the fourth quarter.
The change in our OCI, resulting from higher unrealized losses in the investment portfolio reduced our tangible book value per common share by 43.
And the impact of the redemption of our series E preferred stock reduced our tangible book value per common share by <unk> <unk>.
To position the balance sheet for potential increases in market interest rates and to insulate our tangible book value from the impact of further decreases in ASI, we transferred $328 million of longer duration assets.
<unk> of agency collateralized mortgage backed securities and municipal Securities with high credit quality from available for sale.
Held to maturity.
The unrealized loss on the data transfer totaled $16 6 million and will be deducted from the amortized cost.
Our gross loans increased by $200 million or two 8% during the first quarter.
The growth in the first quarter included $968 million in fundings, including $364 million in <unk> loan purchases as we continue to opportunistically leverage our relationships with mortgage warehouse clients to add high quality, earning assets.
Total commercial loans, which include CRE multifamily construction, C&I and SBA decreased $10 million. However.
However, when PPP loans and warehouse lending are excluded this portfolio increased to $83 million or eight 3% on an annualized basis.
Deposits increased $40 million during the quarter with all of the growth coming from noninterest bearing deposits.
Demand deposits noninterest bearing plus low cost interest checking increased by 3% from the prior quarter.
Over the past year demand deposits increased to 72% of total deposits up from 62%, reflecting the improvement we have made in our deposit base.
This increase combined with our proactive efforts to reduce deposit costs and bringing new relationships drove our all in average cost of deposits down to eight basis points in the first quarter.
As compared to 28 basis points in the same quarter a year ago.
Our credit quality remains strong in the first quarter.
Total delinquent loans decreased to $11 8 million to $61 million.
Nonperforming loans increased two to $54 5 million in the first quarter.
At March 31, 36% of nonperforming loans were either in a car.
Current payment status, but what classified nonperforming for other reasons or SBA loans guaranteed through the PPP or seven eight programs.
Let me turn to our provision for the quarter.
We recognized a negative provision for credit losses of $31 5 million in the first quarter, which included the impact of the $31 3 million recovery of a previously charged off loan as a result of a legal settlement.
In 2019, we had recognized a $35 1 million charge off for this loan and we are extremely pleased we were able to recoup this stockholder value.
Excluding the impact of this recovery, we had a negative provision of $200000 due mostly to changes in the portfolio mix improved macroeconomic variables used for modeling purposes, and then general credit quality of the portfolio all offset by overall loan growth.
Our allowance for credit losses at the end of the first quarter totaled $98 6 million and our allowance to total loans coverage ratio stood at 132%, which is lower than at the end of the prior quarter as we continue to see positive trends in asset quality.
This enabled us to release a portion of the reserves built up during the height of the pandemic.
Excluding our PPP loans in warehouse loans, both of which have lower relative risk levels in our reserve methodology.
<unk> coverage ratio stood at 163% at March 31.
Our ACL coverage to nonperforming loan ratio remained healthy at 181%.
At this time I will turn the presentation back over to Jared.
Thank you Lynn.
I'll wrap up with a few comments about our outlook.
As mentioned since the start of the year.
Our loan pipeline has been steadily building. It is now more than double the size. It was at the same time last year.
With good contributions coming from all asset classes and markets.
Well some of the external factors that I mentioned earlier may still impact the pace of loan closings.
<unk> of the loan pipeline and the increase we typically see in production volumes as we move through the year point to a higher level of fundings than we saw in the first quarter.
Our banking teams are doing a great job of developing new relationships and expanding existing relationships.
And the new bankers that we've added are steadily increasing their productivity and generating high quality lending opportunities for us that we can fund with our consistent inflow of low cost deposits.
We have also had a very focused effort on engaging with the new clients. We added through the Pacific Mercantile acquisition and demonstrating how banc of California can provide increased support for their continued growth and expansion.
As we knew from our due diligence. This is an attractive client base of healthy growing operating companies that will present, many opportunities to expand relationships over the coming years and contribute to our continued growth in commercial loans and low cost deposits.
The colleagues we added from Pacific Mercantile has done a terrific job of integrating and are thriving at banc of California.
We've had a solid start to the year and.
And we are on pace to achieve the goals that we set for 2022.
We see many catalysts for driving higher earnings and returns as we move through the year.
Continued growth in earning assets from our business development efforts.
Additional margin expansion as the fed increases in interest rates and continued focus on growing non interest bearing deposits.
Realizing more operating leverage as we continue to effectively manage expenses while growing revenue.
And the additional earnings resulting from the redemption of the series a preferred stock and share repurchases.
We're also making good progress on our initiatives related to technology and fee income.
We look forward to sharing more on these initiatives in the months to come.
On our earnings call in January .
We indicated that we felt we were extremely well positioned to deliver another strong year in 2022.
Given our growing pipeline our momentum in business development and our visibility on other catalysts that should lead to consistently strong financial performance.
We continue to be confident in our ability to deliver another year of profitable growth.
I want to thank all of our colleagues at Banc of California for their contributions and dedication, which helped us deliver a very solid quarter.
Thank you for listening today, I look forward to sharing more about banc of California's progress in the coming quarters.
With that operator, let's go ahead now and open up the line for questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys and Swift draw. Your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Timur, Brazil, or with Wells Fargo. Please go ahead.
Hi, good morning.
Good morning.
Maybe starting on the loan pipeline certainly encouraging to hear that the pipeline remains very strong even following a strong first quarter.
Can you just provide where you're seeing most of that pipeline build coming from is it continue.
Mentum in C&I as it built up CRE, just kind of what the composition of that pipeline is.
Surprisingly, it's very balanced so there is still a lot of CRE production.
Both on the bridge side and the multifamily side, we are not fixing rates longer than about five years right now except for very selectively so theres still an active market on the permanent financing side for.
10 year loans, where the where the rates arent fixed longer than five years for apartment loans in California.
And that market is still robust as much as rates have moved we still have to remember that rates are still very very low.
On historical basis.
So there's still benefits for people refinancing and properties are coming up.
Off maturities all the time and so people are going to need to seek refinancing and that's just an active transactional market. So that's going to continue.
And then on the C&I side, we've put a lot of emphasis on growing our C&I portfolio and pack Merck certainly contributed there and I think we're seeing the benefit of.
The larger lending opportunities, we're able to provide with our bigger balance sheet.
And Theres just a lot of activity that the economy is holding up very very well in southern California. The jobs report that came out. This morning was obviously very encouraging and so we're benefiting from all of that and so tomorrow, it's not really an.
One area, where we're seeing it fortunately across all of our asset classes and as we mentioned generally we think warehouse.
Is relatively stable it could temper a bit and come down a little bit, but we're growing through that with the growth in our other areas.
Okay, Thanks for that and I guess in.
Context of that larger pipeline, how should we think about SSR purchases going forward with that portfolio being 22% of the overall loan book are you looking to get that closer to 30%, where you might see peers or I guess, how would you frame it yes.
So here's your.
Here's the balancing act, we originally were buying loans through our relationships to offset runoff.
We didn't intend to grow the portfolio in and of itself.
But as we looked at it we thought this is really a very good risk adjusted yield.
And in a very safe asset class. So it was a good return for shareholders.
We're not actively buying a lot right now we have a pipeline that we're that we've committed to that we're we're holding onto.
But it's probably going to slow down as the refinancings slow down in the single family. So everything else is providing a pretty big engine on a core basis, we obviously aren't getting any deposits from that business and so it's not self funding the way some of our other lines of business are so we'll continue to look at it selectively but probably more to two to backfill run off then.
To grow.
Okay.
Last one for me just looking at the funding side, it's been a tremendous transformation in driving 40% DDA.
How are you thinking about future deposit growth in a rising rate environment.
Is there a high level of confidence that you continue to grow deposits kind of despite what might be happening industry wide. Just given continued market share gain in southern California, or do you foresee having to lean maybe more heavily on bar.
Borrowings to help fund near term loan growth.
It's a good question. It's one of the things I think we're as I mentioned in the call. We're most proud of is getting to that 40% and it could go down any given quarter and go back up but it will continue to grow as a percent of overall deposits and what is really special about hitting that threshold was the amount of money that came from new relationships to the bank as I mentioned it was over.
$120 million in the quarter that came from new relationships as opposed to just grabbing money from existing relationships.
As liquidity built up so we are bringing in new relationships to the bank. So we do expect our deposits to grow as our alone.
Balances.
Grow faster than our deposit growth, which could happen then obviously, we will need to rely make sure that we stay close to our target of 95% to 100% loan to deposit and not get too hot and make sure that we're funding appropriately matching duration with with the loan portfolio, which means we could.
Hardly have any brokered deposits to speak up and.
And we really haven't tapped the CV market at either so we have those opportunities we think that our margin will continue to expand and we assess kind of how we do this so the flows every quarter of noninterest bearing and transactional accounts, which include.
Low cost checking accounts.
Thats, what we lead with and then we can we have all these other levers to pull to lead to fill in should we need it.
I don't know if you have any other thoughts there.
I think those are consistent with.
Where we ended the first quarter and.
Our views on the pipeline and some trailing FSFR purchases.
We think that.
To the extent that.
<unk> are a little bit higher in the second quarter, we would continue to use some borrowings in the short term, but I think that the deposit growth in the pipeline. We have there look strong as well.
And we still remain very very focused on the mix.
So to the extent that total deposits go up maybe the pace of non interest bearing deposit growth.
As a little bit tempered so as Jerry mentioned, maybe the ratio moderates more like the average that we saw in the first quarter.
But.
I think.
Looks like it's going to be strong as well.
Yes.
We have.
Dual tax going on at all times of our loan and deposit pipeline and they are both very very strong and but it just happens that our loan pipeline is moving really really well right now and we've got to make sure that we funded appropriately and so we're keeping an eye on that.
Great. Thanks for the color I'll step back into the queue.
Thanks Robert.
The next question will come from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning.
Morning.
Okay.
Maybe maybe one for for Lynn any updated thoughts on your expense guidance that you provided last quarter. It came in a little bit lighter I think.
Of the high end of the range that we probably all expected 45, 5% to $47 million any updated thoughts there.
Thanks, Matt.
I think thats been a big topic related to inflation and maybe the impact on salaries and overall services. So we've been watching that closely I think with fully integrating Pacific mercantile is operations and continuing to see those benefits.
Leverage our expense base I think we continue to stay comfortable with that range.
Might be towards the higher end of it given.
What we are ceiling seen wage pressure a little bit.
And then ongoing investment back into our operations and technology.
So I think we look more to the our adjusted noninterest expense to average asset ratio.
We're at about just over 2%, which is lower than we were a year ago up a little bit from the fourth quarter.
But I think thats.
Something that we look at closely.
Okay.
And then.
On the.
Deposit pricing outlook.
I think the last.
Earnings call. There was an expectation that you could probably hold the line on deposit costs for the first 100 basis points any updated thoughts there given the.
The outlook for more fed rate hikes are relative to the last time.
I'm not sure earnings call and whether or not you are getting any kind of requests from customers yet.
We've gotten very surprisingly very few requests from customers.
We have calls on this frequently and have a feedback loop to make sure that we're sharing the information and thinking about our strategy and have avoided making kind of large wholesale moves across our pricing grid for.
Now again, when Youre focused on noninterest bearing and service and solutions for clients, they're not focused on interest rates. So.
Low cost checking accounts that are fundamentally transactional accounts.
They are really not focused on rate you get you get rate most on the money market and CD, which we've we pushed out some of those higher <unk>.
Cost and rate sensitive clients from <unk>, which was why we didn't show more growth in the quarter. The net number was a little bit lower because we've selectively put stuff out.
So.
I expect we will get it I mean.
The institutional clients that are in <unk>.
Contracted accounts that kind of or like money market or time Cds, we're going to start hearing from them sooner enough here and we're looking out in the market of how are we going to.
<unk> fund loans and make sure that we do it efficiently.
I think the costs are going to go up and I think it was probably going to happen.
And the next quarter or two I don't know if that will happen. This quarter I think it's going to be pretty close to where we are but I think we'll start seeing it tick up by the second half of the year for sure and then we're just going to have to.
Expect our loan growth our loan yield to grow faster than our cost of deposits for sure. So that's why we expect our margin to <unk>.
Or expand.
But we are going to show.
No question, we're going to have to share some of the cost with our clients and it's going to go up the cost of deposits. Yeah. I mean, I would just add ending the quarter with our overnight borrowings at 300 million plus.
We would look to be shifting those into deposits.
Deposit growth. So I think just purely swapping those two out you sort of have an increase.
Stated with market rates, there, but with the growth in earning assets.
The loan yields with outpaced the increase in the deposit funding costs.
Okay, and then just on the buyback could see you guys started it.
Do you feel like you might be able to step that activity up or does the kind of global macro.
Uncertainty that's growing.
Give you some pause.
Yes.
No.
I certainly look we think that our our company is.
Undervalued and certainly think there's opportunistic ways to buy our stock in the market, it's under our program.
We do only we were able to buy during a blackout is when youre under a <unk> five program. So.
We are under that now and then we'll evaluate it when it opens back up but I think we have.
A lot of belief in our company and future value and I think these temporary.
Geopolitical issues notwithstanding I think our company is going to continue to grow and I think our stocks can perform so we think we're a buyer of our stock at these levels.
Okay, and then last one for me just on the on the new loan yields it sounds like there's a little bit of a lift there in a few categories.
What would you attribute that to is it more mix was there some relief in terms of competition just any color there would be helpful.
In terms of.
Rising loan yields.
In terms of new business it sounded like the new <unk>.
Part of the part of the uplift or uptick in loan yields was let's do this.
New business.
Yes, I think.
Yeah.
So loan pricing loan pricing overall has gone up.
In all categories.
So we're as we grow the loan book is just benefiting from higher rates and.
The amount that loan yields have gone up have not caused activity to pause.
Rates are still low enough.
On a historical basis that it's not affecting business activity.
So clients aren't pausing when the rates go up 25 basis points or 50 basis points in terms of getting a new loan.
Theyre, just factoring into the rising cost of doing business and it hasnt slowed their business initiatives, yet if that makes sense.
Does that answer your question Okay.
The next question will come from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning, I appreciate all the color and the commentary on the deposit side and I agree remarkable job there last couple of years.
Just one last question I had was just as Youre thinking of the ACL live I think you flagged kind of the adjusted ACL still up near $1 70.
Obviously, a nice recovery this quarter that went directly into capital how are you thinking about the ACO from here as you think about kind of the seasonal model any any changes to.
The inputs there.
<unk>.
All else equal.
Reasonable to expect a pretty de Minimis, if not negative provision for the year.
Excluding this quarter.
Sure Gary Thank you.
So for the provision and where we ended the first quarter there was a lot going on.
Given that we have been nice recovery of 31 $3 million related to the legal settlement.
So that.
Came through that particular account.
Setting that aside we took a look at our portfolio at the end of the quarter that.
Our credit quality.
The growth that occurred during the quarter and then because we all talk about all the macroeconomic variables our outlook on the economy.
So as we as we look at that we do have certain specific reserves sit.
Inside our reserve levels.
And even setting those aside.
Like we're very well reserves I think now that were.
Two years into the pandemic and we're coming out of that particular.
Crisis I appreciate that there's other uncertainty but.
When we look at the reserve, we're getting close to what May have been viewed as pre pandemic levels in our reserve.
So to the extent that we have net loan growth we think that.
We would.
Expect.
<unk>.
Potentially some modest reserves.
And may be offset by continued improved.
Asset quality.
So I don't know that I would automatically go to the negative reserves I think theres still a lot of uncertainty in the markets and we do work through a process there, but we do think we're well reserved.
An extremely well capitalized as well.
Yeah.
Thank you.
Yes.
Thanks, Gary.
The next question will come from David Feaster with Raymond James. Please go ahead.
Hi, good morning, everybody.
Morning.
I wanted to touch on C&I, obviously, there were some moving parts in the quarter with the transfer, but even excluding that we saw some C&I growth, which is great to see and I know something that you guys have worked really hard on.
I just wanted to get a sense of what use what are you what drove that growth is it new relationships increased utilizations expansion into some of the new segments that you've gone into and just how do you think about your ability to continue to drive C&I growth going forward.
Well I'm looking at our pipeline.
Daily and weekly.
As I mentioned earlier.
Our pipeline is very balanced and so we expect C&I to.
To continue to grow.
Real estate is going to grow too, but we expect C&I to continue to grow and it's it's across all of our assets right now all of our different types of C&I that we're doing.
Line utilization is up slightly it's in the high <unk>.
My point was in the kind of high mid to high Fifty's before the pandemic and right now it's in the high <unk> up a little bit from the mid <unk>, So theres a little bit of contribution there, but not not tremendously it's more just new business from existing and new clients.
Okay, well that's great.
And then we've had you touched on your prepared remarks, you've had a ton of success on the new hiring fraud.
Talent magnet.
Said.
Just curious how the hiring pipeline looks where you're most focused on hiring new producers.
Is it more on some of the specialty lines and then are there any additional lines that you might be interested in.
Or just are you seeing more opportunity on.
The core commercial general commercial bankers.
So the hiring is taking place generally on the production side and were obviously need for or.
The right gearing ratio. So for every production person that you add or for every few you need to add the support people that are critical to how we do our business on the loan operation side, and our analysts and our credit support and our underwriters, who do a tremendous job as well. So we have to balance those as well and then look at how that might impact operations. So there is kind of a.
Ah loop that takes place as you hire in certain areas.
You get leverage you get operating leverage, but you need to make sure that youre youre supported across the across the company. So you don't put too much stress on any one area and that's something we try to get right.
Yes in terms of the.
The specific people that we're hiring.
We've made some inroads on the ABL side, we hired ahead of ABL that we announced and I know that he has been hiring people to fill in on his team.
Previously talked about hires that we've made in the entertainment and media space and obviously, we have to make sure that we're supporting those teams and then we continue to hire in health care and grow just in general commercial.
And real estate I mean, I would say, it's pretty pretty broad based and everything that we've announced we're just continuing to grow. It's a good time right now in southern California and in all the markets. We serve our teams are doing a terrific job in the Bay area and Central Central Valley, where we have folks as well.
<unk>, just theres a lot of new relationships coming to the bank from People's previous.
Engagements and then also just I think our name is out there and I ran into a client on the street. The other day, who said he heard our names three times in the last week and you wanted to get together again and so it's the momentum is certainly there for US right now, which is which is nice.
Great.
Then just touch on maybe on one of the.
One of the exciting things that you guys are working on and I don't believe I heard much commentary in the prepared remarks on it but is the partnership with <unk>.
Just curious where that stands.
And.
Any updates you have on that but also your appetite for additional fintech type partnerships or investments in what you would mostly be interested in.
Is that something that we should expect to see more announcements coming forward.
<unk>.
So I think Linda and I, both hope that by the end of next quarter.
We will be either with our results are before we'll be able to announce more initiatives in the technology space and specifically in payments.
I don't want to go into too much right now because we're not ready to announce it but we are working behind the scenes very actively in that area and our.
Planning some flags in the ground and hope to.
Be able to lay out clearly what our strategy is and I think it will be obvious why we why we pick that as an approach we've been working on it for over 18 months and so we're excited to share when we're when we're ready as it relates to for next year.
I appreciate you asking we said that would be kind of a back half of the year kind of contributor and we're just finalizing agreements and white labeling and putting things in place and it's been it's been a great partnership there they are doing very very well.
The 1 billion in payments threshold and.
We expect that to start showing contribution later in the year.
Terrific. Thanks, everybody.
Thank you.
The next question will come from Kelly Motta with <unk>. Please go ahead.
Hi, good morning, Thanks for the good morning Kelly.
I wanted to circle back on loan growth and specifically on the mortgage warehouse lines, just with the move in rates.
Believe Jerry in your prepared remarks, you had said you expect to grow.
In spite of mortgage warehouse work.
Actually even grow it I just I was wondering if you could just add a bit more color on what we should be expecting there.
Sure I think I think mortgage warehouse will temper. So I think that that the balances that were at right now we're not expecting them to grow.
And they may in fact shrink slightly.
But we expect overall to grow as a company notwithstanding the fact that that line may come down a little bit our team I think we've proven this out pretty consistently I'm kind of tired of talking about it but I know, it's a question, but I think we've proven out consistently that we know what we're doing in that area and that our business is very different than the way it.
Conducted elsewhere, our teams are fantastic and we tend to be the primary and secondary lines for most of the borrowers that we lend to.
And our team has done a great job, bringing in new relationships.
In the warehouse business as well to support our.
The business that we have there.
That said.
Overall.
Financings and refinancings of in the single family market, which is what that business is about are slowing.
And therefore, there's not as much business and it is not as robust the securitization market has slowed a little bit as well as people expect.
Rates to rise and therefore, they want to wait to securitize things that might be it.
They don't want to put on things that are at rates that are lower than they are going to be in the future. So knowing that things have slowed a little bit but our team has done a great job managing it we think it will it's not going to drop off a cliff it's going to it's going to move down gently and our other businesses are growing fast enough to more than offset any slowdown in that area and I.
It's just going to kind of move in tandem and will continue to show growth.
And Thats the way, we see it for the foreseeable future it could stay flat it could shrink a little bit that's kind of what we're planning right now is it might shrink a little bit, but we don't see it dropping massively.
That's really helpful. Thanks, a lot and then of course, keeping keeping that in mind.
And also understanding that repayments are likely to slow as refinances slow.
Do you have any expectation as to our net growth number for 2022 now any changes on the commentary you gave last quarter with that so I would say that first quarter performed better than I would've expected because typically the first quarter slower and we guided to overall for the year kind of high single digit loan growth.
And when I think about that I'm, not really thinking about I'm thinking about kind of our core core growth and thats kind of what we had in the quarter, we we hit on.
Ex <unk>.
PPP and warehouse I think we're at 8% on an annualized basis and so.
That seems about right. Although our pipeline is really strong I just don't know what payoffs are going to be so I, probably would say okay. Now we're high single digit low double digit.
Obviously, you feel comfortable expanding the range knowing that our pipeline is strong.
But.
Again, I don't actually know what we're going to do I, just I mean I don't nobody does we just we just see what's on the horizon and we think we make estimates that we think are appropriate at the time and so right now it's feeling better than it did in the first quarter. So I would be comfortable if people felt like we were going to do a little bit better because I feel like we're going to do a little bit better.
It's hard to actually know what we look at as production and since you can't control payoffs as much as you'd like to our production volume.
Last quarter, including purchases was at an all time high.
And even without purchases it was at an all time high I'm looking at it at a five quarter running total here and.
And I know that this quarter it is going to be even higher and we're probably not even going to do that much in purchases, we have a little bit on the pipeline, but it is going to slow as we get through the year. So.
Yes, Kelly I think that's the best I can do I wish I had a precise more precise number but.
I certainly feel more comfortable that we could hit double digit loan growth. This year, given what we did in the first quarter.
That's really helpful. Thank you so much for the color Jared I'll, yes.
No problem okay.
Okay. Thanks Kelly.
The next question will come from Andrew <unk> with Stephens. Please go ahead.
Hey, Thanks, good morning.
Good morning.
Jerry I just wanted to ask on the buyback I hear you. When you are talking about being attractive kind of at these levels, but given you kind of just announced that I was hoping you could just.
Talk about the framework you think about when when considering the attractiveness of the buyback I don't know if you have any kind of <unk>.
Internal rate of return threshold, our tangible book value earn back you look at when considering the buyback, but just hoping you could share some color there.
I think the best way I can answer that question, Andrew without disclosing what's in our <unk> parameters, because I don't I don't really want to give that color to the market. So that people know what prices, we have agreed to buy it.
I think I would just say that.
The price looks low to me right now I mean, we're trading at.
Less than one five times tangible book and I am looking at our company as a growth company with an expanding margin with 40% non interest bearing deposits and one of the best markets in the country with 12 plus consecutive quarters of doing what we said, we would do probably better than people thought we would do it including ourselves.
Our team always impresses me in terms of outperforming <unk>.
High standards and they do an incredible job.
So I just keep looking at like what's the prove it to me story here that is.
Swing down our price to tangible book I mean, we keep growing our lever our operating leverage Linda did a remarkable job with their team in the quarter of protecting our tangible book value by putting some securities in the held to maturity.
Safe and balanced way, we recovered on the on the.
On the charge off as we said we would I mean.
We're trading too low.
We're going to keep growing I, just don't see anything thats getting in the way of it and so.
That's how I feel about it im obviously biased, but it just seems like we're trading well too low.
We have almost pure like metrics I mean, we will get a return on tangible common up higher ROA.
We haven't talked about was 111 in the quarter people thought we were.
We said, we were going to be above 100% for the year, we hit it out of the park at the beginning of the first quarter I mean.
All of this operating leverage builds on itself and it makes it easier quarter after quarter and so as long as our loan growth continues to hold up and we can solve on the deposit side I think we're going to continue to grow earnings and we have a couple of levers to pull so.
That's my Soapbox I apologize for.
Going off there I just feel like we're trading too low on a tangible book value basis, yes.
That's great color and I appreciate it.
Maybe just one more question for me do you happen to have the yield or the weighted average yield for the I think it was $360 million or so of residential mortgage purchases made this quarter.
Lynn do we have that.
I see on our on our sheet the overall production yield for FSFR.
Alright.
So I think the.
I think.
We haven't necessarily disclosed that but I mean, it's part of our overall.
Yields they've been holding up I want to say theyre in the mid threes.
Upper threes based on.
The rates in the trade yields during the quarter.
It shows up in our net interest margin table thats in the back of the release.
So single family the yield went from $3 32 last quarter to $3 25. This quarter that includes some of the purchases that came through.
Obviously, theres a bit of an inflection point happening with rates moving in the market. So.
We saw pricing start to moderate up sorry.
Sorry, the yields moderate up towards the end of the quarter.
Yes, okay.
Andrew one of the reasons, we like we're still bullish on that portfolio is because it doesn't require very many people to manage it that's outsourced to BMI as the servicer and it's.
These are low loan to value high FICO.
Primary residences of people in California for the most part.
<unk> performed like Clockwork and it was hard to find.
And a very low interest rate environment is hard to find equivalent yields that didn't require tons of people and monitoring that would actually put your actual yield much lower and so on a risk adjusted basis. We felt it was a smart place to put money for our shareholders, but that we don't intend to be a pure single family company at all and so as loan growth picks up in other areas.
So we can get better yields for the return for.
For the risk.
See the SSR portfolio staying flat and.
US growing that's where that is.
Not to say, we wouldn't make other purchases if it made sense and the yields we're right, but we just see growth in other areas really outweighing that.
Okay.
Thanks for taking my question.
Of course, thank you.
Again, if you have a question. Please press Star then one.
This concludes today's conference call along with our question and answer session.
You may disconnect your lines at this time and thank you for your participation.
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